Stock Strategist: Where We’d Invest in Wireless

There’s still value among the big boys of the U.S. wireless industry.
by Michael Hodel, CFAThe U.S. wireless industry has had more than its share of ups and downs over the past decade, passing from boom to bust and into a period of steady growth in recent years. A wave of consolidation over the past couple of years has also dramatically changed the investment landscape; of the four largest carriers, only one, Sprint Nextel S, isn’t buried within a larger firm. The majority of the wireless market is now in the hands of three players, and we’ve been saying for some time that we think this should benefit the industry over time. Yet, some carriers have struggled while many have thrived. We think this divergent performance has created an interesting investment opportunity.

The State of the Wireless Industry
We estimate that Sprint Nextel, Verizon Wireless (the joint venture between Verizon VZ and Vodafone VOD), and Cingular/AT&T Wireless (now wholly owned by AT&T T) collectively counted 75% of all U.S. wireless subscribers as their own at the end of 2006, up from 72% the year before. Though Sprint’s gain came largely as a result of forced acquisitions of affiliate carriers, each of the three added customers, claiming about 80% of all new wireless subscribers industrywide, absent acquisitions. Deutsche Telekom’s DT T-Mobile, the fourth-largest carrier, performed well in 2006, but its share of industrywide growth slipped during the year. The firm remains half the size of Sprint Nextel, the smallest of the big three.